Summary of the Sri Lanka Economic Crisis & What’s Next for the Country

Last Updated on 2022-07-19 , 5:22 pm

Unless you live under a rock, you’d have heard of the situation in Sri Lanka recently.

On 13 July 2022, Sri Lanka’s president, Gotabaya Rajapaksa, has announced that he will resign and soon after, fled the country after months of turmoil in the country. He’s now fled to Singapore, and just confirmed his resignation today via email.

This is brought on by protestors converging on the presidential palace, demanding answers for the months being unable to even get their hands on bare necessities such as food and medicine.

But how bad is it?

The Debts That Started Everything

Simply put…it’s all about money.

The economic crisis sees the country owing a whopping $51 billion to countries such as the US, Germany, Switzerland, China and Japan, to name a few.

The currency has also collapsed by a staggering 80%, making imports even more expensive and worsening inflation that is already out of control. Sources have stated that food costs have increased by a shocking 57%.

This has undoubtedly plunged the country into a humanitarian crisis, the likes of which has not been seen since they gained independence from British rule in 1948.

Sri Lanka’s Finance Minister has also stated that Sri Lanka only has $25 million left in usable foreign reserves, needing up to $6 billion to stay afloat over the next six months.

The result is a country on the verge of bankruptcy, with barely any money to import even bare necessities, such as food, cooking gas, medicine and even toiletries.

Schools have also closed because there wasn’t enough paper to print on. Yes, it’s that bad.

But…

How Did This Happen?

Prior to this, Sri Lanka was doing relative well: they’ve just ended a civil war and the country was developing economically.

It all changed somewhere in 2019.

Experts have pointed to domestic factors such as mismanagement of funds and corruption as reasons for Sri Lanka’s crisis. Tourism, which was a big part of the country’s economic growth, has slowed to almost a dead halt due to a mix of the global pandemic and concerns for safety after terror attacks in 2019.

In April 2021, now former President Rajapaksa suddenly banned the import of chemical fertilizers.

The push for organic farming caught many farmers by surprise, drastically decreased crop output and coupled with Russia’s invasion of Ukraine in February, exacerbated food prices.

There were still many bad decisions made by the government, which explains why the protestors were unhappy with their government.

What’s Next?

In hopes of instilling confidence in the government, Ranil Wickremesinghe. the Prime Minister, is appointed as the acting President of Sri Lanka. This move was also made to get the economy back on track, with many protests demanding the end of the Rajapaksa dynasty, as previously, the Rajapaksa family held many political positions.

Sri Lanka has been hanging on by a thread, mainly supported for the $4 billion in credit line from neighboring India. Sri Lanka is pinning its last hopes on the IMF, with the government in negotiations with the IMF for a bailout plan, with hopes of agreements being reached by late July.

Political corruption could also be a major factor as not only did it lead to the government squandering its wealth, it also further complicates financial aid for the country going forward.

Anit Mukherjee, a policy fellow and economist at the Center for Global Development in Washington, said that should the IMF or World Bank choose to provide any assistance, it should come with strict conditions to make sure that it is not mismanaged again.

Mukherjee also notes that Sri Lanka sits on one of the world’s busiest shipping lanes and letting such a strategically placed country collapse is not an option.

Simply put, the country is now hoping that other countries will help them out.

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